Ahead of the Government’s gas strategy, Shell chief executive Peter Voser reveals why it is the fuel of the future and how he is riding the shale revolution.
Peter Voser believes Shell is creating value out of the whole of the production and supply chain and that its exposure to gas growth is the jewel in the crown Photo: Reuters
By Kamal Ahmed: 9:00PM GMT 17 Nov 2012
It was apt that Royal Dutch Shell chose the Royal Institution in London’s Mayfair as the venue for its briefing with investors last week.
It would not have been lost on Peter Voser, the energy giant’s chief executive, that the institution was the working home of Michael Faraday, the man who in 1831 built the first electric motor and on whose principles the whole of electric power generation is based.
The Royal Institution was launched in 1799, a time when Britain was at war with France and fear stalked the establishment. Would the rapid industrialisation of the UK be put at risk by a lack of access to continental markets? For the princely sum of 500 guineas, members could join an “institution for diffusing the knowledge and facilitating the general introduction of useful mechanical inventions”. The country needed to work out how to make more energy to feed the beast of growth.
Wind forward 213 years and energy and its production is still at the heart of the debate. According to Shell’s own presentations last Wednesday, the world’s population is expected to grow to more than 8bn by 2030 from 7bn today. GDP per capital is set to triple by 2030 in India and China, which will bring 2.5bn people “much higher up the energy ladder in the coming decades”. Energy demand “could double” by 2050, with nearly all of that growth coming from emerging markets.
Before the end of the month, Ed Davey, the British energy secretary, has pledged to announce an energy bill laying out how the UK will play its part in maintaining supply to households and businesses in a world where the battle for resources and the production of new sources of power is a costly matter.
What is the correct mix between fossil fuels and renewable energy? How and where does nuclear fit in? In another paper to be published alongside the bill, the Government will signal its direction of travel. A Gas Strategy will lay out plans for more than 20 new gas-fired power stations. If the past was about coal and oil, the future is about gas, with huge new finds from both conventional and unconventional (shale gas) sources. The message will be music to Voser’s ears.
“Energy demand will rise constantly and significantly,” Voser said in an interview with The Sunday Telegraph. “We need to generate an energy landscape that gives us a lower carbon footprint. That gives us all challenges and opportunities.
“In all of this we see very strong gas growth. It is really driven by availability – there is some 250 years of gas resources available. It is acceptable from a CO2 footprint point of view, producing 50pc to 70pc less CO2 than coal for example. It is affordable currently and in the longer term.
“We have been building our gas strategy for 30 years because we saw this coming. Shell will produce more gas than oil this year, or at the latest by next year.” Shell, he makes clear, is not simply an oil company.
Voser’s big worry is that Europe could be left behind in the dash for gas, a continent left reliant on volatile imports while the rest of the world races towards self-sufficiency.
“Europe is facing the situation of decreasing domestic production,” he said. “Europe will need to import more gas or it will have to allow the unconventional gas to be developed.
“At Shell we don’t think the unconventional gas will be developed very fast, because of permitting and policy issues.
“My concern is that around Europe the gas demand is growing so fast that Europe might be left behind for signing up for some of the production that is being built around the world.”
Voser knows he needs to convince – whether on gas or the broader performance of Shell. In a broker’s note in September, Santander downgraded Shell to “reduce”, claiming that the company would be facing significant costs to kickstart earnings growth.
“While Shell remains resource rich, it is light [on] significant new projects, value, cash flow or earnings catalysts,” the note said. “The company has also already peaked in terms of a core strategic goal: delivery of cash growth.”
The note said that Shell will deliver the lowest growth of any European major until 2017 and that returns to shareholders could be diluted as Shell chased expensive projects in Alaska, China and East Africa.
At its most recent quarterly numbers at the beginning of November, Shell reported profits of $6.12bn (£4.5bn), down from $7.2bn for the same period last year. Lower oil and gas prices and the general economic downturn have taken their toll.
In response, Voser argues that Shell – as an integrated company – is creating value out of the whole of the production and supply chain and that its exposure to gas growth is the jewel in the crown. Steady investment through the cycle is what shareholders want, not a stop-start strategy.
Investors were reminded last week that gas exploration, production and supply were “30-year assets with attractive returns”. The company was not in the business of chasing “short-term volume targets or market share”.
“I am driven by long-term shareholder value and rewarding our shareholders through the dividend stream,” Voser said. “We paid close to $11bn dividend last year, so every £1 in £7 [paid in dividends by FTSE 100 companies] is from us.
“I feel that burden,” he says with a smile. “We are generating sufficient value to maintain our growing dividend strategy that we have. In our business you cannot be short term.”
In a room to the right of the main entrance of the Royal Institute, Shell has positioned a model of a boat, or, to be more precise, a liquefied natural gas facility the company is paying to construct in a Korean shipyard. When completed, “Prelude” will sit off the coast of Australia and process gas ready for shipping around the world.
Nearly half a kilometre long, the boat is the largest offshore facility in the world and is a testament to Shell’s bet on a gas-rich future.
Three As drive the investment case as far as Voser is concerned – gas is abundant, affordable and acceptable.
“Strong growth in gas markets is a major opportunity for Shell and our shareholders,” Voser told investors. “Our Integrated Gas earnings have more than trebled in the last five years, reaching $9bn over the last year, driven by liquefied natural gas and gas-to-liquids, and we see growth opportunities to invest over $20bn here for 2012-15.
“We are aiming to develop profitable new gas supplies to meet the market’s growing demand for clean and affordable low-carbon energy. This plays to Shell’s technology and financial strength.”
The company estimates that global gas demand will increase by 60pc between 2010 and 2030, with “primary demand” doubling from the present 200m barrels of oil equivalent per day (boepd) to 400m. Voser argues that gas is not just a source of energy but is a “feed stock” for the chemical industry, agriculture and pharmaceuticals – all sectors with a strong positive correlation to global growth.
The infrastructure necessary to refine and transport the energy source will also need to grow rapidly. The production of liquefied natural gas (LNG), one of Shell’s main business divisions, will expand “to cover 15pc of global gas supply by 2030”.
Shell’s integrated gas division now accounts for 25pc of the group’s cash flow and 22pc of production in the past 12 months, with a 34pc increase in production and a 46pc increase in LNG sales in the past three years.
Large gas finds in Mozambique, Tanzania, Qatar and Iraq have also driven production development.
And then, of course, there is China. “The gas needs in China are going to be tremendous,” Voser says. “If you read their five-year plan, gas doubles from 4pc to 8pc [of the energy mix] and they have very aggressive shale and tight gas [unconventional gas reserves held in rocks] targets there. They have clearly signalled that gas development is key for the growth of their economy.”
Shell has a long-term agreement with China National Petroleum Corporation (CNPC) to develop natural gas deposits in the country and in other territories including Australia. It operates gas fields in the Changbei tight gas field in Shaanxi province with PetroChina, a subsidiary of CNPC.
Beyond China, the other major energy development involves the other global behemoth – America. Last week, the International Energy Agency (IEA) suggested that new developments in shale gas and oil would make the US the world’s largest producer of gas by 2015 and the largest oil producer by 2017. The development and the fact that America could be energy self-sufficient was, according to the IEA, “nothing short of spectacular”.
“The US is on the path to becoming energy self-sufficient,” Voser says. “It has the tight shale-gas revolution, it has tight oil and it also has a lot of untapped oil resources in the Gulf of Mexico and in Alaska, which really can deliver sufficient gas and oil for their own consumption.
“It will be key for the US to use this advantage in gas feed-stock to drive the manufacturing industry in the States in a different way.
“If you have a cheap feed-stock and you go from gas to chemicals, you will start to produce petrochemicals, which is the base for many manufacturing industries.
“You also have energy-intensive industries like steel – if you get an advantage on the feedstock you can bring a lot [of production] back to the US. This will be the job generator.
“I think you will see the rebirth of the manufacturing industry in the US driven by an advantaged energy picture. This will develop very fast over the next decade.
Shell is extremely well positioned in that.” As he mentioned earlier, Europe, sadly, is not.
One of Shell’s most high-profile US projects is in the Arctic, where controversy has stalked its $4.5bn scheme to develop new oil fields. The drilling programme was held up by legal action, regulators and the weather, as well as Shell’s own safety codes, which have slowed production.
“We are very proud of what we have achieved,” Voser said of the stuttering progress so far. “It is a multi-year programme and we will not rush it. Having drilled the top holes is a good achievement. Would we have liked to drill into hydrocarbons? Yes.”
Reports have suggested that Shell will have to press for the American government to extend the present licences, which expire in 2015.
“We are concentrating at the moment to drill into hydrocarbons next year,” Voser said. “We are sure there is an interest by the government and the regulators for the necessary success to continue to operate there.”
Will Shell need an extension? “It is too early to say. Let us first do 2013 and then I can give you a better answer.”
Where Voser is willing to go further is on the aftermath of the failed bid for Cove Energy, the oil explorer which had a lucrative 8.5pc stake in another rich gas exploration site off Mozambique. Shell bid $1.22bn for Cove but pulled out of the process after it was trumped by an offer from Thailand’s PTT Exploration & Production.
“We didn’t like the price and the valuation,” Voser said, pointing out that the huge gas field was still in the early stages of development. Italian company ENI and American explorer Anadarko have stakes in the field.
“We had the concern that in a public auction the price goes to a level we could not justify. We have plenty of growth options in our pipeline. It [any deal in the area] needs to match these other projects from a profitability point of view.
“We will continue and look for other options or we will develop the options we have already. If I look at the ENI and the Anadarko venture, what is missing is someone with the capability of building a total infrastructure for LNG including the downstream – the selling part – and therefore I think that’s what both consortiums have realised. We’ll see where they go.”
So, you could be the ideal partner? “We could offer that. But I don’t lose sleep by not being there. If the price is right I will maybe consider it. We’ll see.”
Shell CEO throws weight behind Government’s ‘dash for gas’
The chief executive of Royal Dutch Shell has backed the Government’s “dash for gas”, saying that the fossil fuel is abundantly available, environmentally friendly and will provide energy for the next 250 years.
By Kamal Ahmed: 9:00PM GMT 17 Nov 2012
Peter Voser said gas was a fuel for the future and that Shell would be investing $20bn (£12.6bn) in the sector between 2012 and 2015.
“We see very strong gas growth,” Mr Voser said in an interview with The Sunday Telegraph.
“It is really driven by availability, there is some 250 years of gas resources available against current demand. It is acceptable from a CO2 footprint [point of view], producing 50pc to 70pc less CO2 than coal for example, and it is affordable currently and in the longer term.”
Next week the Government is expected to announce its gas strategy, which will propose the building of 20 new gas-fired power stations in the UK.
Gas power stations are seen as a flexible alternative to controversial renewable energy which is often unavailable during cold spells because of a lack of wind or sunshine.
“From a total energy point of view we see this as the right step forward,” Mr Voser said when asked about the Government’s proposals.
He warned, though, that Europe could fall behind America and China in the development of unconventional gas.
Last week, the International Energy Agency said the US could become a net exporter of oil and gas by 2017 as it had discovered major reserves of shale gas.
“My concern is that around Europe the gas demand is growing so fast that Europe might be left behind,” he said.
He also revealed that he would be willing to look at possible tie-ups in the newly discovered east African gas fields after a $1.2bn bid to buy Cove Energy failed.
“We will continue to look for other options or we will develop the options we have already,” he said.
The Italian energy company, ENI, and the US energy company, Anadarko, have already invested in the area.
“If I look at the ENI and the Anadarko venture, what is missing is someone with the capability of building a total infrastructure for LNG [liquefied natural gas] including the downstream, the selling part, and therefore I think that’s what both consortiums have realised,” Mr Voser said.
Asked if Shell could play that role, he answered: “We could offer that. But I don’t lose sleep by not being there. If the price is right I will maybe consider it.”
Although committed to some renewables, Mr Voser made it clear that the focus of the business was on fossil fuels. He said that policymakers should not try to push renewable energy before the technology had time to develop.
Subsidies for renewables would also have to reduce.
“I don’t believe in any business model that has to rely on subsidies,” he said.
“If you take a gas plant plus carbon capture and storage you get to a CO2 avoidance price which is much better than renewables today.”
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